Dropbox Rockets Higher on First Day of Trading

What happened

Shares of cloud storage company Dropbox (NASDAQ: DBX) soared on Friday, its first day of trading as a public company. The company priced its IPO at $21 per share, above an earlier estimate of $16 to $18 per share. The stock was up about 33.5% at 3:45 p.m. EDT.

So what

It's been a long road for Dropbox, which was founded back in 2007. The decade-old company has amassed over 500 million registered users in that time, with most of them taking advantage of its free offering. About 11 million of those users pay Dropbox for beefier plans, which offer more storage space and a broader feature set.

A rising stock chart.

Image source: Getty Images.

Dropbox isn't profitable on a GAAP basis, but revenue is growing quickly, and free cash flow is squarely positive. In 2017, Dropbox generated $1.1 billion of revenue, up 31% compared to 2016. That came with a $112 million GAAP net loss, but free cash flow totaled $305 million.

One reason for Dropbox's impressive free cash flow is its successful shift away from third-party cloud infrastructure providers. The company completed its transition to its own infrastructure toward the end of 2016. This led to a gross margin of 66.7% in 2017, more than double its 32.5% gross margin in 2015.

Despite ongoing losses, Dropbox's growth coupled with clear steps aimed at improving profitability seem to have won investors over.

Now what

While Dropbox is enjoying some Wall Street love today, the company still has a tough fight ahead of it. Cloud storage is a competitive market, and Dropbox will need to go toe to toe with Microsoft, Alphabet, Amazon, Apple, Box, and plenty of other smaller players. The company doesn't appear to have any real competitive advantage, but many of its competitors certainly do.

This doesn't mean Dropbox can't be a solid investment in the long run. But a strong debut will need to be followed up with improving financial performance for the stock to be a long-term winner.

More From The Motley Fool

• 3 Growth Stocks at Deep-Value Prices

• 5 Expected Social Security Changes in 2018

• 6 Years Later, 6 Charts That Show How Far Apple, Inc. Has Come Since Steve Jobs' Passing

• 10 Best Stocks to Buy Today

• The $16,122 Social Security Bonus You Cannot Afford to Miss

• Bitcoin's Biggest Competitor Isn't Ethereum -- It's This

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Teresa Kersten is an employee of LinkedIn and is a member of The Motley Fool's board of directors. LinkedIn is owned by Microsoft. Timothy Green has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Alphabet (A and C shares), Amazon, and Apple. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.